Silvercorp Metals - Precious Metals Producer with Upside Potential

• Silvercorp Metals is a diversified precious metals producer primarily operating mines in China that produce silver, lead, and zinc. They also have significant investments in companies like New Pacific Metals with promising projects in Bolivia.
• The majority of their current production is from mines in China.
• Financially, Silvercorp has strong fundamentals with revenues over $200 million, EBITDA just under $100 million, and a cash balance of $213 million. They haven't raised any equity since 2010, with the cash primarily coming from their profitable operations.
• The company is actively seeking to deploy their large cash balance for growth opportunities in the precious metal space. They are considering acquisitions, especially development companies where they can utilize their balance sheet.

Silvercorp Metals (SVM) is a Canada-based diversified precious metals producer with operating mines generating strong cash flows in China. Silvercorp Metals also holds a significant investment in exploration company New Pacific Metals (NUAG) and has a large cash balance to deploy for further growth. With its low-cost producing assets and financial strength, Silvercorp offers investors defensive exposure to silver and other precious metals.

Cash Flow From Chinese Assets Funding Growth

Silvercorp's main assets are three operating mines in China producing silver, lead and zinc. These mines generated over $200 million in revenue, $100 million in EBITDA and $107 million in operating cash flow in Silvercorp's latest financial year ending March 2022. After taxes and capital expenditures, Silvercorp Metals had almost $50 million in free cash flow.

The company has an exceptional track record of steady profitability and cash flow generation dating back to acquiring and developing its mines starting in 2004. Silvercorp has not needed to raise equity capital through share issuances since 2010, funding growth entirely through operating cash flows. The company held $213 million in cash as of March 2022.

Silvercorp's flagship Ying Mining complex has a reserve-based mine life of over 20 years. The company is actively exploring around existing operations and has identified new mineralized zones that could further extend mine lives. The GC mine has 13+ years of reserves remaining. Silvercorp expects its China mines to continue generating strong cash flows for the foreseeable future.

Investing Cash Outside China for Growth

While Silvercorp's producing assets are currently located in China, the company is looking to deploy its cash for new growth opportunities outside of China. Areas of focus include the Americas and Africa. Silvercorp is open to investing in both silver and gold deposits.

In 2020, Silvercorp Metals negotiated a deal to acquire Guyana Goldfields and its open pit to underground gold mine development project in Guyana before the transaction ultimately fell through. Last year Silvercorp reviewed over 30 potential projects, signing confidentiality agreements and conducting in-depth due diligence. The company continues to evaluate advanced projects where it could leverage its technical capabilities and balance sheet strength.

An ideal acquisition for Silvercorp would involve a development-stage asset that could be built into its next cash flowing mine. This would further diversify Silvercorp's production profile.

Defensive Silver Exposure with China Focus

Silvercorp recognizes investor concerns around its concentration in China. However, the company highlights that many multinational firms across sectors operate successfully in China, including mining companies. Silvercorp has adapted to the stringent and improving regulatory environment in China and collaborated effectively with local authorities.

While geopolitical risks are real, China provides a relatively stable operating jurisdiction for Silvercorp Metals. The company's low-cost production base also helps offset inflationary pressures compared to miners facing sharply rising costs in many western countries.

With rock-solid fundamentals and substantial cash reserves, Silvercorp offers a defensive way for investors to gain exposure to silver and other precious metals compared to more marginal producers. The company continued generating profits and accumulating cash even during periods of low silver prices that severely stressed much of the industry.

Major Exploration Upside in New Pacific Metals

In addition to its operating mines, Silvercorp holds an important 32% stake in exploration company New Pacific Metals. New Pacific's flagship project is the large Silver Sand deposit in Bolivia, which published an initial mineral resource estimate in 2020 and is now moving into permitting and mine development.

New Pacific Metals also has an exciting new discovery at its Carangas project, also in Bolivia. Early indications point to significant silver, gold and base metals mineralization. Assay results from the initial shallow discovery holes included intersections as high as 1,560 g/t silver over 6 meters and 1.4% copper over 86 meters. NUAG has multiple rigs drilling at Carangas and results could drive substantial resource growth.

With advanced projects and major exploration upside, New Pacific Metals gives Silvercorp investors substantial optionality on high-potential precious and base metals discoveries in a proven region. New Pacific's success in Bolivia also further diversifies Silvercorp's geographic exposure.

Trading at a Discount to Fair Value

Despite its steady cash flows and strong balance sheet, Silvercorp trades at a significant discount to fair value. The company's enterprise value is around $575 million, including its equity stake in New Pacific Metals. That is just over 2.5x estimated 2022 EBITDA guidance of $220-235 million.

Many precious metals producers trade at 5-10x EBITDA in the current metal price environment. The discounted valuation appears driven by China investment concerns that management feels are overblown. Silvercorp argues its financial track record and ability to operate successfully in China are overlooked.

The company aims to surface value by deploying its cash for acquisitions that bring in new assets and cash flows. This could attract investor interest and lead to a potential rerating. Silvercorp's share price remains depressed, but with its low costs and cash position it is better positioned to be patient for quality deals than many competitors.

The Investment Thesis for Silvercorp

Silvercorp Metals has highly profitable mines generating strong free cash flow, a rock-solid balance sheet, and exposure to substantial exploration upside through its New Pacific Metals investment. The company is searching for an accretive acquisition that could reignite market interest and a rerating after its shares have languished.

While China's risk is real, Silvercorp has adapted to the local regulatory environment and its low-cost production helps insulate it from cost inflation pressures. With its operating cash flows and financial strength, Silvercorp can be patient with the right growth opportunities. For investors seeking defensive silver and precious metals exposure, Silvercorp merits consideration.

• Steady cash flows from low-cost mines: Silvercorp's operating mines in China have very low costs and generate strong operating cash flows even at lower metals prices. This gives the company financial stability and downside protection compared to higher-cost producers.
• Strong balance sheet to fund growth: With over $200 million in cash and no debt, Silvercorp has a fortress-like balance sheet that allows it to invest in new growth projects without diluting shareholders. Many miners are cash-constrained.
• Exploration upside through New Pacific Metals: The significant investment in New Pacific Metals provides shareholders with upside exposure to potentially world-class exploration assets. Major new discoveries at New Pacific Metals projects could re-rate Silvercorp's shares.
• Discounted valuation: Trading at just 2.5x EBITDA, Silvercorp appears significantly undervalued compared to similar precious metals miners. An accretive acquisition or exploration success could attract investor interest.
• Inflation hedge: Precious metals like silver tend to perform well during periods of high inflation. Silvercorp provides leverage to increased metals prices while its low costs help defend profit margins.
• China production base: While China risk exists, Silvercorp's operating track record in China has been strong. China also provides relative stability compared to many emerging market mining jurisdictions.

Silvercorp's low-cost production, strong balance sheet, discounted valuation, exploration upside, and leverage to metals prices make it an appealing investment in the precious metals space. The company has many attractive attributes for investors seeking defensive exposure.